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FBI Perkins Testimony Re Mortgage Fraud

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FBI Perkins Testimony Re Mortgage Fraud STATEMENT OF KEVIN L. PERKINS ASSISTANT DIRECTOR, CRIMINAL INVESTIGATIVE DIVISION FEDERAL BUREAU OF INVESTLGATlON BEFORE THE JUDICIARY COMMITTEE UNITED STATES SENATE ENTITLED "MORTGAGE FRAUD, SECURITIES FRAUD, AND THE FlNANCIAL MELTDOWN: PROSECUTING THOSE RESPONSIBLE" PRESENTED DECEMBER 9,2009 Good afternoon Chairman Leahy, Ranking Member Sessions, and Members of the Committee. 1 want to thank you for the opportunity to testib before you today about the FBI's ongoing efforts to cotnbat significant financial crimes. As we all know, financial fraud, to include mortgage, corporate, and securities frauds, were tlot the primary sources,of the current Financial crisis; collectively however, these frauds have significantly impacted the U.S. housing and financial markets. Mortgage Fraud continues to pose a significant threat to lenders, investors, residrntial real estate values, and the U.S. economy. The FBI delineates Mortgage Fraud into two distinct areas: I) Fraud for Profit: alld 2) Fraud for Housing. Fraud for Profit generally employs schemes to remove equity, falsely inflate the value of the property, or issue loans relating to fictitious properties. Many of the Fraud for Profit schemes rely on "industry insiders," who override lender controls. The FBI defines indunry insiders as appraisers, accountants, attorneys, real estate brokers, mortgage underwriters and pracessors, settlementltitle company employees, mortgage brokers, loan originators, and other mortgage professionals engaged in the mortgage industry. Fraud for Housing, on the other hand, represents illegal actions perpetrated by borrowers, typically with the assistance of real estate professionals. The sitnple motive behind this fraud is to acquire and maintain ownership of a residence undel- false pretenses. This type of fraud is ty pitled by a borrower who makes misrepresentations regarding the income or employment history to qualify for a loan, which the borrower would othenvise not qualify for. Although generally not as sophisticated as Fraud for Profit schemes, Fraud for Housing has played a large role in the decline of residential real estate values since unqualified buyers defaulted on loans they would othenvise not have obtained but for their fraud. The FBI compilcs data on Mortgage Fraud through Suspicious Activity Reports (SARs) filed by financial institutions through the Financial Crimes Enforcement Network (FinCEN). and through reports generated by the Department of Housing and Urban Development (HUD) Office of Inspector General (OIG). The FBI also receives and shares information pertaining to Mortgage Fraud through its national and regional working groups, as well as complaints from the industry at large. Mortgage Fraud, however, is just one componeilt of the recent financial crisis, which has left trillions of dollars of losses in its wake as the Dow Jones Industrial Average fell to 6,547 in March 2009 from its high of 14,164 in October 2007. Throughout the past decade, a flourishing market developed for the securitization and sale of assets such as mortgages hy financial institutions and other entities who were seeking to alleviate risk, increase cash flows and profit from these complex financial products. As underwriting requirements began to erode, sub-prime assets began to make up the majority of asset backed securities. In 2007, the markzts for sub- prime asset backed securities began to collapse, which has been credited as one of the primary causes of the financial meltdown. In the wake of this historic eco~lomiccalamity, the FBI has and will continue to invtutigatte criminal allegations related to the activity that contributed to the financial crisis using all available tools at our disposal. Since the financial meltdown in the fall of 2007, the FBI has effectively combated significant financial frauds on various fronts. For example, we have rnore than 2,100 pending Corporate and Securities Fraud investigations across the country, marly with losses exceeding $100 million. and several with losses over $1 billion. The FBI has prioritized its efforts to combat the most egregious Corporate and Securities Fraud offenders, which resulted in 460 convictions in Fiscal Year (FY) 2009. Financial Fraud Trends It is no secret that the financial crisis caused severe damage to both the financial markets and investor confidence. The crisis not only revealed new fraud schemes, such as material misrepresentations in the marketing of asset backed securities, but also exposed established fraud schemes which had been thriving in the global financial system, such as, Ponzi schemes. These schemes, both old :~ndnew, highlight the need for law enforcement and regulatory agztlcies to be ever vigilant, and work closer together, to identify financial fiaud both in boom and bust years. Securities Fraud - Hi~hYield Investment FraudIPonzi Schemes High Yield Investment F~.audschemes have many variations, all of which are characterized by offers of low risk investments, guaranteeing at1 utiusually high rate of return. Victims are enticed by the prospect of easy money, and a hst turnaround. The most common form of these frauds is the Potlzi scheme, which is named aRer early 20th century criminal Charles Ponzi. These schemes use money collected from new victims, rather than profits from an underlying business venture, to pay the high rates of return promised to earlier investors. This ai-1-angementgives investors the impression there is a legitimate, money- making enterprise behind the fraudster's story; bur in reality, unwitting investors are the only source of funding. Another type of High Yield Investment Fraud is Prime Bank Investment Fraud. In these schemes, victims are told that certain financial instruments such as notes, letters of credit, debentures, or guarantees have been issued by well-known institutions such as the World Bank. and offer a risk- free opportunity with high rates of return. Perpetrators often claim unusually high rates of return and low risk arc: the result of a worldwide secret exchange open only to the world's largest financial institutions. Victims are often drawn into Prime Bank In\ estment Frauds because the criminals use sophisticated terms, legal looking documents, and claim that the inv~strnentsare insured against loss. As the financial crisis expanded, drying up investment funds and causing investors to begin seeking returns of their principal, investment fraud schemes began to unravel. In FY 2009, the FBI realized a 105% increase in new High Yield Investment Fraud investigations when compared to FY 2008 (314 as opposed to 154). many with losses exceeding $100 million. Many of the Ponzi scheme investigations have an international nexus, and have affected thousands of victims. The most significant of these, the $64 billion Ponzi scheme perpetrated by Bernard L. Madoff, resulted in the longest prison sentence in the history of financial crime - 150 years. Similarly, both, Robert Allen Stanford of Ho~istun,Texas. and Thomas Petters of Minneapolis, Minnesota, have been charged in alleged billion dollar Ponzi schetnes. Petters was recently found guilty by a jury in Minnesota of 20 counts of fraud and otllrr federal offenses. The FBI continues to aggressively investigate this cri~ninalthreat, and cunently has more than 1,500 related Securities Fraud investigations. lnsider Tradina The FBI proactively investigates lnsider Trading schemes, using all available tools to remove the most egregious offenders from the financial markets. A recent highlighted success came with the indictments and subsequent arrests related to allegations of Insider Trading within Galleon Group. a prominent Hedge Fund, located in Ncw York City. To date, fourteen individuals have been arrested and the investigation is ongoing. The FBI cot~tiriuesto work closely with the U.S. Securities and Exchange Commission (SEC) on such matters, in a parallel law enforcement and regulatory effort to ensure fairly operated financial markets. Lack of regulatory oversight and transparency in the Hedge Fund industr). makes this industry susceptible to various types of Securities Fraud and insider trading, alld creates challenges to law enforcement. In addition, fraud committed by Hedge Funds poses a serious threat of substantial losses due to the fact Hedge Funds are typically highly leveraged. Corporate Fraud As the lead law enforcement agency investigating Corporate Fraud, the FBI has focused its efforts on cases which involve accounting schemes, self-dealing by corporate executives, and obstruction of justice. The nlajority of Corporate Fraud cases pursued by the FBI involve accounting schemes designed to deceive investors, auditors, and analysts about the true financial condition of a corporation. Through the manipulation of financial data, the share price of a corporation's stock remains artiticially inflated based on fictitious performance indicators provided to the investing public. In addition to significant financial losses to investors, Corporate Fraud has the potential to cause immeasurable damage to the U.S. economy and investor confidence. The FBI has observed a rise in Corporate Fraud schemes and trends, such as, the failures of pro~i~inentfinancial institutions partly caused by the recent coltapse of the Sub-prime market, the falsitication of accounting records to obtain guve~nmentfundi t~g through the $700 billion Troubled Asset Relief Program (TARP), and misrepresentations regarding the risks and valuations of complex financial instruments (e.p., credit default swaps and mortgage
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